State legislation on health reform is hot across the nation.  More than 10 states have comprehensive health care reform bills or proposals under review, and it is expected that more states will follow.  Several additional states have already established committees to study health reform.

Massachusetts and Vermont have passed laws in 2006 that achieve virtually universal coverage as well as address cost and quality of care. 

The Massachusetts program requires most people to have health insurance by July 2007.  Vermont’s law, which includes access to subsidized or lower cost insurance, relies on voluntary participation.

Many of the 2007 legislative bills and state commission’s proposals have similar components. 

The Massachusetts Health Care Reform Act (the “Act”) mandates that individuals obtain health insurance coverage and in addition, requires that employers with 11 or more employees establish a compliant Section 125 Cafeteria Plan by July 1, 2007. 

The intent of the Cafeteria Plan requirement is to make it more affordable for employees to comply with the Law’s individual coverage mandate.  Employers also benefit because of the payroll tax savings on employee’s salary reductions used to pay for insurance premiums.

With the July 1, 2007 deadline fast approaching, on March 20th a new state agency, the Commonwealth Health insurance Connector, created by the Law issued emergency regulations on Cafeteria Plans.  The regulations provide guidance to employers on determining coverage, requirements for a compliant plan, employee eligibility, and timing and filing requirements.

Internal Revenue Code 125 permits employees to make pre-tax contributions toward health insurance under so called Cafeteria Plans, which allow employees to choose between taxable benefits (e.g., cash compensation) and non-taxable benefits (e.g., health insurance) without being taxed if they choose the latter. 

The Act’s basic Cafeteria Plan requirement is that employers with more than 11 full-time employees in the Commonwealth of Massachusetts must adopt and maintain a Cafeteria Plan and file a copy of the plan with the Connector.  The Act further requires small groups that choose to designate the Connector as their group health plan to establish a Cafeteria Plan to permit employees to get the benefit of pre-tax treatment for their health insurance premium payments.

The Cafeteria Plan requirement applies to all employers with 11 or more employees at locations within the Commonwealth of Massachusetts, regardless of whether the employer offers medical care insurance on an insured or self-insured basis, whether such insurance is purchased on an individual or group basis, or whether employees obtain insurance through the Commonwealth sponsored Connector Plan.

Employee means any individual employed by an employer at a Massachusetts location, whether or not the individual is a Massachusetts resident. To determine if the employer has 11 or more employees, the employer must total all payroll hours over a one-year period for all employees, including full-time, part-time, temporary and seasonal employees, and divide that total by 2,000.  If the number is greater than or equal to 11, then the employer is covered by the mandate and must establish and maintain a Cafeteria Plan. Payroll hours include all hours for which the employer paid wages, including regular time worked, holidays, vacation, paid leave and sick time, as well as time spent on short-term or long-term disability.  While overtime should also be included, the maximum number of hours to be counted for an employee is 2,000. 

Whether an employer has 11 or more full-time employees is tested on the basis of a “determination period”.  The determination period for the initial determination of coverage is from April 1, 2006 to March 31, 2007.  If the employer is covered for that period, then it must have a compliant Section 125 Cafeteria Plan in place by July 1, 2007.  Subsequent determination periods are based on a fiscal year beginning each July 1st and ending the following June 30th.   Employers with 11 or more full-time equivalent employees during any subsequent determination period become subject to the Cafeteria Plan requirement on the following October 1st.

The Connector regulations require that a compliant Cafeteria Plan must allow employees to pay for health insurance premiums through the plan and offer access to at least one medical care coverage option.   The emergency regulations do not require that an employer contribute towards the medical insurance offered.   Cafeteria Plans with only a Flexible Spending Account plan, or premium only plans that do not include access to any medical coverage will not satisfy the requirements for a plan contained in the emergency regulations.

Plans must also satisfy all the Internal Revenue Code requirements for Section 125 Cafeteria Plans.

Other mandates of the Act include the following employer penalties for failure to comply with the Act:

• Fair Share fee: Employers with 11 or more employees who do not offer coverage pay $295 per worker annually.
• Free Rider Surcharge: Non-providing employers(an employer of a state-funded employee) will also be subject to a Free Rider Surcharge between 10 % and 100% of the claim costs if more than 5 uninsured employees use free public health care or if any one uninsured employee uses free care more than three times a year. 

For more detailed information on the Massachusetts Health Care Reform Act and the Emergency Cafeteria Plan rules, click on the following links:

http://www.hcfama.org/act/

http://www.hcfama.org/act/mahealthreformlaw.asp

http://mass.gov/legis/laws/seslaw06/sl060058.htm

http://www.hcfama.org/act/documents/ACT!!%20fact%20sheet%2020061222.pdf

http://www.mass.gov/Qhic/docs/Emergency%20151F%20Reg_4%20clean.doc